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CFP Exam Prep > General Principles of Financial Planning > Flashcards

General Principles of Financial Planning Flashcards

B.7 Financial planning process B.8 Financial statements B.9 Cash flow management B.10 Financing strategies and debt management B.11 Economic concepts B.12 Time value of money concepts and calculations B.13 Education needs analysis B.14 Education savings vehicles B.15 Education funding B.16 Gift / income tax strategies

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1
Q

Registered Investment Advisors (Registration)

A

If an advisor has less than $100M AUM, the advisor must register with the state.

If an advisor has more than $110M AUM, the advisor must register with the SEC.

If an advisor has between $100-110M, they can choose between either state or SEC.

File Form ADV to register with SEC
File Form ADV-W to withdrawal from the SEC.

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2
Q

Registered Investment Advisors (Rules/Registrations)

A

You may not use the letters RIA after you name. You may only use the words, Registered Investment Advisor.

Advisory Contracts cannot be assigned to another advisor or firm without the client’s consent.

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3
Q

Investment Advisors Act of 1940

A

Someone who is in the business of providing advice about securities for compensation.

**Know your ABCs: Advice > Business > Compensation

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4
Q

Form ADV Part 1A

A

Purpose: provide regulators with necessary information to monitor and oversee investment advisers, ensuring compliance with regulations and protecting investors.

Form Information:
1. Identifying Information - Name, address, contact info.
2. Form of Organization
3. Principal Office and Place of Business.
4. Other Business Activities
5. Financial Industry Affiliations - e.g. CPWP and NM
6. Disciplinary Information

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5
Q

Form ADV Part 1B

A

Purpose: Collect additional information required by state securities regulators.

**Form ADV Part1B is not necessary for Investment Advisors who are registered under the SEC.

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6
Q

Form ADV Part 2A

A

“The Brochure”

Purpose: To provide clients with a comprehensive overview of the investment adviser’s business practices.

Contents:
Description of services offered
Fees and compensation
Investment strategies and methods of analysis
Disciplinary information
Code of ethics
Brokerage practices
Conflicts of interest
Financial information

Format: Often presented as a narrative document that is easy for clients to understand.

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7
Q

Form ADV Part 2B

A

“The Brochure Supplement”

Purpose: To give clients information about the specific individuals who will provide advisory services.

Contents:
Educational background and business experience of the supervised person
Disciplinary history
Other business activities
Additional compensation
Supervision details (who supervises the person and their contact information)

Format: Typically provided as a supplement to Part 2A, focusing on key personnel.

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8
Q

Form ADV Part 3

A

Purpose: aims to provide retail investors with a concise and clear summary of the relationships and services provided by an investment adviser or broker-dealer. This part is intended to help investors understand the types of services offered, fees and costs, conflicts of interest, and the standard of conduct that applies to their relationship.

AKA - Client Relationship Summary (CRS)

Provides retail investors with a brief overview of the investment adviser’s or broker-dealer’s services.
Explains the types of client relationships and services offered.
Discloses fees, costs, conflicts of interest, and the standard of conduct.
Helps investors understand what they can expect when engaging with the adviser or broker.

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9
Q

Exceptions to Registration with the SEC

A

Coffee TAABLE

Magazines, Newspapers, etc. (sits on coffee table)

Teacher
Accountant/American gov. guaranteed securities.
Banks/Bank holding companies
Lawyer
Engineer

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10
Q

Exemptions to Registration with the SEC

A

VIPs are SaFE

VENTURE Capital
INSURANCE Companies
PRIVATE funds < $150M
home STATE
FOREIGN Advisors
securities not on a national EXCHANGE

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11
Q

Brochure Rule

A

Written disclosure of advisory services provided, fees, types of securities included in investments, educational background, and participation/interest in securities transactions.

**This information must be given to a client BEFORe or at the time of entering into a contract. Compliance with the brochure rule is accomplished by providing a written, plain English summary of ADV Part 2A/B.

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12
Q

FINRA Tips

A

Financial Industry Regulatory Authority

Register with Form U-4
Separate with Form U-5

Series 6: Mutual Funds, UITs, VA Life Insurance/Annuities
Series 7: Everything except commodities and futures

**To sell VA Life Insurance/Annuities, you must also have a state insurance license.

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13
Q

Dodd-Frank Wall Street Reform and Consumer Protection Act

A
  • Lenders must now verify whether, based on income, credit history, and other data, a borrower can reasonably be expected to repay their loan.
  • Lenders are prohibited from refinancing borrowers unless the new mortgage provides a benefit to the borrower.
  • After losing their jobs, homeowners who are unable to pay may qualify for up to $50,000 in loan assistance. * Banks must retain at least 5% of risky loan exposure on their books.
  • The FDIC limit was made permanent at $250,000.
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14
Q

Accredited Investment

A

Have $1 million net worth exclusive of a personal residence, OR - Make a minimum of $200,000 in each of the two most recent years if single, and a reasonable expectation of the same income level in the current year or

Make a minimum of $300,000 of joint income with a spouse (or a spouse equivalent*) in each of the two most recent years, and a reasonable expectation of the same income level in the current year.

Spousal equivalent is defined as a cohabitant occupying a relationship generally equivalent to that of a spouse

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15
Q

The Financial Planning Process

A

UIADPIM - Uber Is A Drunk Persons Immediate Motor (vehicle)

  1. Understanding the client’s Personal and Financial circumstances.
  2. Identify and Selecting Goals
  3. Analyze the clients current course of action and potential alternative course(s) of action.
  4. Develop the financial planning recommendations.
  5. Present the financial planning recommendations.
  6. Implement the financial planning recommendations.
  7. Monitoring progress and updating.
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16
Q

Benchmarks for Insurance/Risk Management

A

Life Insurance: 10-16x gross pay

Health Insurance: $1M lifetime cap pre-ACA

Disability: 60-70% of gross pay

Property: less/equal to FMV for home and auto

LTC: Inflation protected. 36-60 months. Provides daily benefit for nursing home care, home health care or help with ADLs.

PLUP: $1-3M in liability protection

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17
Q

Benchmarks for Short Term Savings and Investments

A

Emergency Fund: 3-6 months of non-discretionary expenses.

Housing Ratio: 28% of gross income. (Primary mortgage, including PITI - principal, interests, taxes, and homeowners insurance)

Housing + All other debt ratio: 36% of gross income.

Consumer debt payments should not exceed 20% of NET income

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18
Q

Benchmarks for Long Term Savings and Investments

A

Education Funding: Depending on the university, a client should save $3k (public), $6k (semi-private), or $9k (competitive private) per year for 18 years.

Retirement Amount: At age 62-65 an individual should have 16 times the amount of income needed annually saved for retirement. In other words, if an individual needs $100,000 a year in retirement income, the individual needs 16 x $100,000, or $1.6 million in retirement assets.

Savings Rate: Assuming starting at an early age, an individual should save between 10-12% towards retirement. Education goal is extra.

Return on Investments: Assuming long-term time horizon, 8-10% ROI.

Risk: 8-14$ for the SD of a diversified portfolio.

Legacy: The BIG 3 Documents
1. Will
2. Durable Power of Attorney for Healthcare
3. Advanced Medical Directive

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19
Q

Demand Curve

A

The demand curve will shift and, thus, create a change in demand due to an increase or decrease in:

Income
Taxes
Savings Rate
Disposable Income.

**Anything that causes discretionary income to increase will shift the demand curve up and to the right.

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20
Q

Supply Curve

A

The supply curve will shift to the left or right because of a change in:

Technology
Competition
Anything other than price

**Anything that cause production to improve will shift the supply curve down and to the right

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21
Q

Substitutes

A

Products that serve a similar purpose

A price change in one product changes the quantity demanded for another product.

e.g. If the price for movie tickets suddenly increases, the demand for movie rentals may suddenly increase.

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22
Q

Complements

A

Products that are consumed jointly.

A price change in one product changes the quantity demanded for another product.

e.g. If razors are put on sale, demand for razor blades may increase.

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23
Q

Price Elasticity

A

a change in price will mean a significant change in the quantity demanded.

e.g. increase in plane tickets, results in less tickets being sold.

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24
Q

Price Inelasticity

A

a change in price does not really change the quantity demanded. Necessities like food or gas fall into this category.

e.g. an increase in the price of eggs, means an increase in revenue for whoever is selling the eggs, because demand stays the same.

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25
Q

Business Cycle

A

Expansion
Peak
Recession/Contraction
Trough

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26
Q

Expansion

A

Inflation - Increasing
Interest Rates - Increasing
Unemployment - Decreasing
GDP - Increasing

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27
Q

Peak

A

Inflation - Highest
Interest Rates - Highest
Unemployment - Lowest
GDP - Highest

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28
Q

Recession/Contraction

A

Inflation - Decreasing
Interest Rates - Decreasing
Unemployment - Increasing
GDP - Decreasing

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29
Q

Trough

A

Inflation - Lowest
Interest Rates - Lowest
Unemployment - Highest
GDP - Lowest

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30
Q

Recession

A

six consecutive months (or two quarters) of declining GDP

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31
Q

Depression

A

18 consecutive months (or six quarters) of declining GDP

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32
Q

Inflation

A

Increease in prices.

Loss of purchasing power is the risk of inflation.

Moderate Inflation: prices slowly increasing, around 1-2% per year. Historical is about 3% over the last 60 years.

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33
Q

Galloping Inflation

A

When money loses value very quickly

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34
Q

Deflation

A

Deflation is the opposite of inflation, where prices are falling.

During periods of deflation, individuals prefer to hold cash because cash becomes more valuable, as it can buy more goods and services, and prices decrease.

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35
Q

Disinflation

A

Decline or slowdown int he rate of inflation

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36
Q

CPI

A

The Consumer Price Index (CPI) measures the price change in a basket of goods and services at the retail level.

CPI is applicable to consumer purchases and is historically 2-3%.

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37
Q

PPI

A

The Producer Price Index (PPI) measures price changes in the wholesale and manufacturing sectors.

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38
Q

Economic Indicators

A

Leading economic indicators anticipate changes in the economy.

Coincident indicators change along with changes in the business cycle.

Lagging indicators summarize or “confirm” past performance

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39
Q

Leading Indicators

A
  • Initial unemployment claims * Stock prices
  • Money supply (M2)
  • New manufacturing orders * New private housing units
  • Consumer sentiment
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40
Q

Coincident Indicators

A
  • Employees on payroll
  • Personal income
  • Industrial production
  • Manufacturing sales
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41
Q

Lagging Indicators

A
  • Avg. duration of unemployment
  • Change in the CPI
  • Change in labor cost per unit
  • Consumer credit to income
  • Value of outstanding loans
  • Avg. prime rate charged by banks
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42
Q

Monetary Policy

A

Monetary policy is the policy and means by which the Federal Reserve controls the money supply and influences interest rates.

The Federal Reserve has three main goals:
- Maintain long-term economic growth.
- Maintain price levels supported by the economy.
- Maintain full employment.

The Federal Reserve has the ability to:
- Ease Monetary Policy (through increasing money supply and decreasing interest rates.)
- Tighten Monetary Policy (through decreasing money supply and increasing interest rates.)

Tools:
1. Reserve Requirement
2. Discount Rate
3. Open Market Operations
4. Excess Reserves

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43
Q

Fiscal Policy

A
  • Fiscal policy is the policy and means by which Congress controls spending and taxation, which influences the money supply and interest rates.
  • Congress has three goals related to fiscal policy:
  • Maintain economic growth.
  • Maintain price stability.
  • Maintain full employment.

Tools:
1. Taxation
2. Spending
3. Debt Management

**Note: Foreign investors also influence the money supply and interest rates. Foreign investors selling dollar dominated assets will decrease the money supply and increase interest rates. Alternatively, buying dollar dominated assets will increase the money supply and decrease interest rat

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44
Q

Fair Credit Reporting Act

A

If a consumer is refused credit or employment based upon information contained in a credit report, the consumer must be provided with the information in the report.

The three main credit bureaus are Equifax, Experian, and Transunion.

Consumers have the right to one free credit report once a year from each of the three bureaus.

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45
Q

Fair Debt Collection Act

A

Collection telephone calls are limited to 8:00am – 9:00pm.

Collectors must contact your attorney if you have an attorney.

Collection calls are not permitted at work if your employer forbids such calls.

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46
Q

Fair Credit Billing Act

A

Gives a creditor 30 days to acknowledge receipt of a billing dispute and explain or correct the error within 90 days.

A consumer’s liability for a lost or stolen credit card is limited to $50 (if notice is given to the credit card company) or the actual amount charged on the card, whichever is less

47
Q

Truth in Lending Act

A

Lenders must disclose the total cost of financing, including the cost of any credit life insurance.

Interest must be stated in terms of Annual Percentage Rate (APR).

Truth in Lending Act is administered by the Federal Reserve.

48
Q

Credit Card Accountability Responsibility and Disclosure Act of 2009

A

Credit CARD Act

Card companies must give cardholders 45 days’ notice of any interest rate increases.

Card companies cannot charge interest on debt that is paid on time during the grace period.

A credit card cannot be issued to someone under age 21 unless they have a co-signer who is 21 or over.

Late fees are generally limited to $25 ($35 if a payment was missed in the last 6 months).

49
Q

FDIC Insurance

A

Each depositor has a total of $250,000 of insurance per type of account ownership.

Four types of ownership:
Individual accounts
Joint accounts
Trust accounts (per owner, per beneficiary)
Self-directed retirement accounts.

Accounts at different banks are insured separately; therefore, a depositor could deposit $250,000 in accounts at two different banks and still be insured for a total of $500,000.

The amount of insurance for an IRA (and other retirement plans, e.g. SEPs) is up to $250,000 as long as the IRA is invested in bank deposits such as CDs. FDIC insurance does not cover mutual funds, stocks, bonds or annuities.

50
Q

Chapter 7 Bankruptcy

A

Provides relief through liquidation. Below are examples of debts that are not discharged through Chapter 7:

  • Students and Government loans.
  • 3 years of back taxes.
  • Alimony and Child support.
  • Monies owed due to malicious acts, drunk driving, criminal fines and penalties, or embezzlement.

Bankruptcy filing may remain on the credit report for up to 10 years.

Means testing began in October 2005 to determine if a debtor would be permitted to file for Chapter 7 Bankruptcy protection.

If the debtor’s average monthly income for their region is in excess of the threshold they cannot file for Chapter 7.

51
Q

Chapter 11 Bankruptcy - Exempt Property

A

Exempt property: homestead, life insurance, qualified plans

Debts related to fraud are not discharged but debts associated with negligence are discharged.

Contributory Traditional and Roth IRAs are exempt assets, up to $1 million as indexed every three years. Filings between April 1, 2022 and March 31, 2025 will have $1,512,350 in protection.

IRAs Inherited by a non-spousal beneficiary will have no bankruptcy protection (unless a trust is named).

Qualified plans along with converted IRAs have an unlimited exemption. Converted IRAs (aka rollover) must be clearly marked rollover and have no other contributions commingled.

52
Q

Chapter 11 Bankruptcy

A

Provides relief through reorganization for businesses or the self-employed

53
Q

Chapter 13 Bankruptcy

A

Provides relief through adjusting debts

54
Q

Workers Compensation

A

Workers compensation is an absolute form of liability.

Regardless of fault if injured at work the employee will collect benefits.

55
Q

Unemployment Compensation

A

Unemployment compensation provides moderate income replacement, for a specified period of time, if an employee loses his job.

Unemployment compensation insurance premiums are funded by a tax on employers.

Maximum number of weeks to receive unemployment is 39 with regular benefits lasting up to 26 weeks. The additional 13 weeks is for periods of high unemployment.

56
Q

Securities Act of 1933

A

Regulates new issues of securities in the primary market.

The primary market is the securities market where new issues are sold to the public for the first time.

New issues constitute initial public offerings.

57
Q

Securities Act of 1934

A

Regulates secondary markets.

Secondary markets constitute the buying and selling of securities that were previously sold in the primary market.

Established the SEC, whose primary function is to regulate the securities market.

58
Q

Securities Investor Protection Act of 1970

A

Created Securities Investor Protection Corporation (SIPC)

Provides coverage if a broker-dealer becomes insolvent or if there is unauthorized trading in an investor’s account.

59
Q

Reserve Requirement (Tool)

A
  • The reserve requirement is a percentage of deposits a bank must maintain in cash.
  • As the reserve requirement increases, there’s less cash available to lend; therefore, the money supply decreases and interest rates increase.
  • As the reserve requirement decreases, there’s more cash available to lend; therefore, the money supply increases and interest rates decrease.
60
Q

Discount Rate (Tool)

A
  • The discount rate is the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements.
  • As the discount rate increases, short-term interest rates increase.
  • As the discount rate decreases, short-term interest rates decrease.
61
Q

Open Market Operations (Tool)

A
  • As the Federal Reserve buys or sells government securities, the money supply is influenced and places pressure on interest rates.
  • As the Federal Reserve buys Treasuries, money supply increases and interest rates decrease.
  • As the Federal Reserve sells Treasuries, money supply decreases and interest rates increase.
62
Q

Excess Reserves (Tool)

A
  • Excess reserves are monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount.
  • In 2008, under the Economic Stabilization Act, the Federal Reserve began paying interest on excess reserves.
63
Q

Taxation (Tool)

A
  • Increasing tax rates will reduce money available for spending, thereby increasing interest rates.
  • Decreasing tax rates will increase money available for spending, thereby decreasing interest rates.
64
Q

Spending (Tool)

A

Increasing tax rates will reduce money available for spending, thereby increasing interest rates. * Decreasing tax rates will increase money available for spending, thereby decreasing interest rates.

65
Q

Debt Management (Tool)

A
  • Deficit spending is when Congress spends more than tax revenues that are collected.
  • Because of deficit spending, Congress must borrow to continue spending. As Congress borrows more, the amount of dollars available to be lent decreases, and it places increasing pressure on interest rates.
66
Q

Yield Curve

A

The yield curve is a diagram that plots the current interest rates against the term to maturity for similar securities, such as Treasuries.

The fiscal or monetary policy in effect will help to determine the shape of the yield curve.

67
Q

Normal Yield Curve

A
  • The normal yield curve is concave, sloping upward to the right.
  • Expansionary policy from both fiscal and monetary typically results in a normal yield curve.
68
Q

Inverted Yield Curve

A
  • The inverted yield curve is convex, sloping downward to the right.
  • Contractionary policy from both fiscal and monetary typically results in an inverted yield curve
69
Q

Life Cycle Position

A

Age
Marital Status
Dependents
Income and Net worth

*Life cycle position may be important in a case question when determining a client’s goals, needs, strengths and weaknesses

70
Q

Age - Life Cycle

A
  • Age is the most important element in financial planning.
  • Age impacts goals, priorities, risk and timing.
71
Q

Marital Status - Life Cycle

A
  • Creates the need or desire to provide for a spouse.
  • Marital status may establish mutual goals for a new house, life insurance to meet goals in the event of an untimely death, disability insurance for income replacement and liability insurance.
72
Q

Dependents - Life Cycle

A
  • Can be children or elderly parents.
  • The number of children impacts education funding decisions and life insurance nee
73
Q

Income and Net worth - Life Cycle

A

A client’s level of income and net worth create the need for tax minimization and asset protection.

74
Q

Comprehensive Planning

A

Insurance: Disability, medical, liability, property, LTC.

Investments: Diversification, market fluctuations.

Emergency Funds: 3-6 months of expenditures

Estate Planning: Big 3 Documents

Financial Issues: Budgeting, saving, investing

Legal Issues: estate planning, guardianship, past marriages.

75
Q

Check-list for caregivers (Best Practices)

A

This may include contacts in your area, lists of government assistance available:

Social security disability [SSDI]
supplemental social security income [SSI]
Medicaid

notations of legal documents to secure (living wills, special needs trusts, letter of intent, etc.)

76
Q

Job loss check-list (Best Practices)

A

file for unemployment, begin looking for work, determine what benefits can continue (COBRA) and which can roll to an individual plans (life insurance, retirement plans, etc.).

know the timing of these items:
60 days to elect COBRA

typically 60 days to roll over a 401k (some companies may allow the assets to remain part of the company plan.

typically 90 days to exercise options or restricted stock.

77
Q

Special Needs

A
  • Government benefits – identifying, obtaining, and preserving benefits
  • Family and support factors – family values, careers, siblings, extended family, and community resources. - Does the client have any children or elderly parents with special needs?
  • If so, it may create additional medical or care expenses for the client.

*Is the client in a nontraditional family?
- If so, there will be issues getting assets to the appropriate person.
- A planner must ensure that assets are titled appropriately so that assets avoid probate and are directed to the appropriate person.

78
Q

Key Federal Programs

A

Special Education Programs - supported by Individuals with Disability Education Improvement Act 2004.

Social Security Benefits - including disability, SSI, and Medicaid.

Benefits for Disabled Veterans - The Department of Veterans Affairs offers programs for disabled veterans.

79
Q

Key State/Local Programs

A
  • Residential services
  • Transportation services
  • Respite Care Services
  • Family Support Services
  • Day Program Services Employment Services
80
Q

Balance Sheet

A
  • A balance sheet is a listing of assets, liabilities, and net worth.
  • A snapshot of account balances at a “moment in time.”
  • Proper dating is, “As of December 31, 20xx.”
  • Formula: - Assets – Liabilities = Net Worth
81
Q

Limitations of a Balance Sheet

A
  • Why or how an asset increased in value.
  • Whether the client bought more of the asset or did the asset appreciate?
  • Why or how an asset or liability appears on the balance sheet.
  • Whether the client purchased an asset or inherited the asset?
82
Q

Statement of Income and Expenses

A
  • a listing of income, savings, expenses and taxes.
  • Income includes salary, interest, dividends and business income.
  • Savings is an outflow to retirement plans, education savings or any other savings account.
  • Expenses are both variable and fixed expenses.
  • Examples of fixed expenses include: mortgage, car payment, boat payment, student loan payment and, generally, any expense that remains constant each month.
  • Examples of variable expenses include: car repairs, entertainment expenses, utilities, charitable contributions and, generally, any expense over which the client can exercise control.
  • Presents income and expenses “over a period of time.”
  • Proper dating would be, “For the Year 20xx.”
83
Q

Current Ratio

A

Current Assets / Current Liabilities

84
Q

Debt Ratios

A
  • Consumer debt payments should not exceed 20% of NET income.
  • Housing debt should be less than or equal to 28% of GROSS income.
  • Housing plus all other recurring debt should be less than or equal to 36% of GROSS income.
85
Q

Buying vs Renting

A

It’s appropriate to rent or lease if the client’s time in the property is going to be short (1-3 years).

It’s appropriate to buy if the client’s time in the property is going to be long (>3 years).

  • If the client’s goal is to build equity.
  • If the client is in a high marginal tax bracket because of the income tax deduction for interest expense associated with the client’s primary residence.
86
Q

Adjustable Rate Mortgage

A

An ARM is appropriate when the client’s time in property will be short (1-3 years).

A 2/6 ARM means the interest rate cannot increase more than 2% per year or 6% during the term of the loan.

87
Q

Reverse Mortgage

A
  • Under a reverse mortgage the homeowner receives a monthly payment or lump sum from a bank while retaining the right to live in the house.
  • Repayment of the outstanding mortgage occurs at the homeowner’s death.
  • A reverse mortgage is appropriate to generate income for elderly homeowners.
  • Available if the homeowner is age 62 or older.
88
Q

Savings Ratio

A

Annual Savings (EE + ER Contributions) / Annual Gross Income

  • A benchmark savings ratio target is 10-12% of gross income if the client starts saving before age 32.
  • If a client waits to begin saving at 45 or 50, the rate may be 20-25% of gross income.
  • It’s important to include employer contributions to 401(k), profit-sharing plans, etc., as part of the savings ratio calculation.
89
Q

Federal Pell Grant

A
90
Q

Stafford Loan

A
91
Q

Subsidized vs Unsubsidized

A
92
Q

PLUS Loan

A
93
Q

PLUS Direct

A
94
Q

Federal Perkins Loan Program

A
95
Q

FSEOG

A
96
Q

IBR

A
97
Q

PAYE

A
98
Q

REPAYE

A
99
Q

Graduated Repayment

A
100
Q

Extended Repayment

A
101
Q

Income Contingent Repayment

A
102
Q

Prepaid Tuition

A
103
Q

529 Savings Plan

A
104
Q

529 A ABLE Accounts

A
105
Q

Coverdell Accounts

A
106
Q

Roth IRA (Education Purposes)

A
107
Q

Series EE/Series E Savings Bond

A
108
Q

UTMA/UGMA

A
109
Q

Deductibility of Student Loan Interest

A
110
Q

Lifetime Learning Credit

A
111
Q

American Opportunity Tax Credit

A
112
Q

Employer Education Assistance

A
113
Q

Summary of Qualified Education Expenses

A

CFP Exam Prep (8 decks)

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